To play MP3s on my A500 (020), I use DiamondGUI with mpega.library and convert to 16bit AIFF. Then I play the AIFF with SongPlayer and AHI calibrated to 14bit. It sounds great with no skipping. I just don't try to do too much else while it's playing. The AIFF file gets huge though. If I want a smaller file, I then convert down to 8bit IFF.
The other thing I do if I'm just checking an MP3 for the first time is play it (with DiamondGUI/mpega) with buffering - so that it calculates first, then plays without skipping. To buffer 60 seconds of music takes my A500 about 1 1/2 minutes though.
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